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spk06: Good day, and thank you for standing by. Welcome to the Barnes Group Incorporated Third Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bill Pitts, Director, Investor Relations. Please go ahead.
spk01: Thank you, Operator. Good morning, and thank you for joining us for our third quarter 2021 earnings call. With me are Barnes Group's President and Chief Executive Officer, Patrick Dempsey, and Senior Vice President and Chief Financial Officer, Julie Streich. If you have not received a copy of our earnings press release, you can find it on the investor relations section of our corporate website at bginc.com. During our call, we will be referring to the earnings release supplement slides, which are also posted on our website. Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors. These measures have been reconciled to the related gap measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of the press release and in the form 8K submitted to the Securities and Exchange Commission. Be advised that certain statements we make on today's call, both during the opening remarks and during the question and answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC. These filings are available through the investor relations section of our corporate website at BGINC.com. Let me now turn the call over to Patrick for his opening remarks. then Julie will provide a review of our financial results and details of our updated outlook for 2021. After that, we'll open up the call for questions. Patrick?
spk00: Thank you, Bill, and good morning, everyone. Barnes Group delivered a very good third quarter of financial performance with 20% organic sales growth, a 180 basis points increase in adjusted operating margin, and an 80 plus percent increase in EPS year over year. Sequentially, each of those metrics improved as well. Clearly, last year was highly impacted by the global pandemic. Nonetheless, the demand environment overall improved across the portfolio as each of our SBUs generated double digit organic sales growth. Similarly, orders were seasonally good, as we generated a book to bill of 0.9 times for both industrial and aerospace. Industrial book to bill in the third quarter is typically impacted by the summer holiday season, particularly in Europe. That said, the ongoing impact of auto semiconductors lingered, and I'll address that in more detail shortly. In aerospace, orders were healthy for a fourth straight quarter. Moving to our segment discussion, beginning with industrial. Organic sales growth was 17%, while organic orders growth was 3%. As we exit the third quarter, manufacturing PMIs in the U.S. and Eurozone remain well in expansionary territory, though not as robust as they were entering the quarter. China continues to hover around the neutral 50 mark, The continuing semiconductor issue affecting automotive bills has worsened, prompting IHS to make a significant downward adjustment to their global automotive production forecast in September. Relative to their prior view, 2021 production was reduced by 5 million units, or 6%, and 2022 was reduced by 8.5 million units, or 9%. The decrease corresponds to customers extending shutdowns and pushing out demand for our products. For 2022, IHS expects global auto production to grow 11% over this year, so still a rebound. Supply chain disruptions, including extended raw material lead times, inflation and freight costs, have also persisted throughout the quarter. and we expect them to continue through the remainder of the year and into the first half of 2022. In spite of the headwinds, the industrial team has done a great job to improve margins both year over year and sequentially. Operating margin was 13% up 60 basis points from a year ago and 130 basis points sequentially. Inflationary pressures are being mitigated to the extent possible through pricing actions and raw material pass-through arrangements. Our Barnes Enterprise system is being employed to create various cost savings. While our July outlook contemplated $2 million of second-half inflation pressure, we saw approximately $2.5 million in the third quarter, and we now forecast a similar amount in the fourth quarter. Within molding solutions, organic orders were up low single digits with medical rebounding up year over year and sequentially. Automotive orders were solid up mid-teens, driven by a strong quarter in Asia. Packaging and personal care orders were soft compared to a year ago. With respect to organic sales, we generated a 15% increase over the prior year quarter. Personal care and medical saw good sales growth, while automotive was particularly strong. However, with anticipated supply chain factors in mind, our organic sales growth outlook has been trimmed to the low teens for the full year, a bit softer than our prior view. At force of motion control, organic orders were up 27%, with organic sales up 24%. On a sequential basis, sales and orders were approximately flat. Our largest end market with this business, sheet metal forming, saw robust orders and sales growth year over year. And the same is true for our industrial end markets within FMC. Supply chain disruptions, including freight delays, are expected to influence near-term customer orders. Nonetheless, our full year 2021 organic sales growth is up slightly from a prior view, with a revised expectation of up high teens. Engineered components once again generated solid organic sales growth on a year-over-year basis, up 15%, primarily driven by industrial end markets. Our automotive production end market sales were up modestly. Though the third quarter saw semiconductor and supply chain issues intensify, impacting both orders and sequential sales growth. The automotive semiconductor issue impacts this business the most, and we saw a third quarter push out of approximately $6 million in revenue, which was double what we anticipated. We now forecast a fourth quarter impact of a similar $6 million. General industrial markets remain very healthy and are helping to mitigate some of the semiconductor impact. For engineered components, our full-year organic sales growth is now estimated to be up in the mid-teens, a bit lower than our prior view. At automation, we produced a solid quarter of 24% organic sales growth, as global trends towards industrial robotics and complex end-of-arm tooling solutions remain favorable. As noted earlier, with seasonal effects, year-over-year organic orders were flat. However, we continue to expect 2021 to deliver organic growth of approximately 20% on par with our July expectation. To close my industrial discussion, the business delivered really good third quarter performance. As we look forward, the near-term challenges of the current operating environment appear likely to persist. That said, the team is working diligently to lessen the various headwinds facing the business. For this segment, we forecast 2021 organic growth in the mid-teens, consistent with our prior view. We now anticipate operating margins of 11.5% to 12%, a bit softer than our prior expectation, with the decline primarily driven by the current economic environment. Moving to aerospace, sales improved 30% over last year and 8% sequentially from the second quarter. Our original equipment manufacturing and aftermarket businesses each generated excellent results. Adjusted operating margin improved 490 basis points from a year ago and 130 basis points sequentially. The aerospace environment continues to show recovery progress. Global passenger traffic and flight activity are expected to increase further as international markets reopen. Aerospace freight markets continued to be strong. All of that contributes to a strengthening aftermarket. Correspondingly, our sequential sales growth has been good, and we expect that trend to continue. Solid order activity continued in the third quarter, with total orders up approximately 70% versus a year ago. OEM orders were up approximately 80%, with the aftermarket being up approximately 50%. Within the aftermarket, MRO was up 40 plus percent and spare parts up 70%. Our 2021 outlook for aerospace is for total sales to be up low single digits. Within the segment, OEM sales are forecast to be up mid single digits, MRO down low single digits and spare parts down in the low to mid teens. the latter a bit better than our July view. Segment operating margin is anticipated to be approximately 14%, slightly higher than our prior outlook, benefiting from the better spare parts mix. In closing, a solid third quarter of financial performance in the face of some accumulating pressures. As we look ahead, we're taking the necessary steps to limit the risks noted. with our primary focus on pricing initiatives and other actions directed to cost management. Overall, we are positive in the ongoing demand we are seeing from our customers and the underlying strength of our end markets. Moving forward, our growth investments in strategic marketing and our sales force, digitalization and innovation should enhance our ability to power up the recovery curve and allow us to deliver further stakeholder value. Now let me pass the call over to Julie for details of our quarterly performance.
spk05: Good morning, everyone, and thank you, Patrick. Let me begin with highlights of our third quarter results on slide five of our supplement. Third quarter sales were $325 million, up 21% from the prior year period, with organic sales increasing 20%. Adjusted operating income was $43.9 million, up 39% from $31.5 million last year, while adjusted operating margin was 13.5%, up 180 basis points from a year ago. Our adjusted results include a small amount of restructuring in both the current and prior year quarters. Interest expense was $4 million, an increase of $300,000 over last year as a result of a higher average interest rate offset in part by lower average borrowings. As we foreshadowed a quarter ago, we saw a sequentially lower interest expense as our debt to EBITDA ratio has continued to improve, driven by the recovery in our business and active cash management. Sequentially, our interest expense was lower by $448,000. For the quarter, our effective tax rate of 27.6% compared with 44.1% in the third quarter of 2020 and 37.6% for full year 2020. As compared to the full year 2020 rate, Our third quarter rate is benefiting from the absence of tax expense related to the sale of the Seeger business in 2020, a benefit relating to the tax basis of goodwill at automation, the positive resolution of a foreign tax matter in the current year quarter, and a favorable mix in earnings based on tax jurisdictions. These items were partially offset by a charge relating to UK legislative changes. Net income was $27.9 million, or $0.55 per diluted share, compared to $15.4 million, or $0.30 per diluted share, a year ago. Now I'll turn to our segment performance, beginning with industrial. Third quarter industrial sales were $232 million, up 18% from a year ago, while organic sales increased 17%. Like last quarter, the solid growth reflects volume increases across all our SBUs. Favorable foreign exchange increased sales by approximately 1%. Sequentially, sales decreased slightly as they were further impacted by the semiconductor and supply chain issues that Patrick mentioned. Industrial operating profit was $30.1 million, up 23% from $24.4 million last year. Operating profit benefited from the contribution of higher sales volumes, offset in part by higher personnel costs, which include incentive compensation, higher sourcing costs, inclusive of freight, and ongoing costs incurred in support of segment growth initiatives. Operating margin was 13%, up 60 basis points from a year ago and 130 basis points sequentially. Moving now to aerospace. Sales were $94 million, up 30%, driven by a 23% increase in our OEM business and a 46% increase in our aftermarket business. On a sequential basis, total aerospace sales increased 8% from the second quarter of 2021, with OEM up 5% and aftermarket up 16%. Operating profit was $13.6 million, doubling the $6.8 million in last year's third quarter. Excluding a small amount of restructuring in the current and prior year periods, adjusted operating profit was up 95% from a year ago. Adjusted operating profit benefited from the contribution of higher sales volumes and favorable productivity offset in part by higher personnel costs, including incentive compensation. Adjusted operating margin was 14.8%, up 490 basis points from last year and 130 basis points sequentially. Aerospace OEM backlog ended September at $665 million, down 4% from June 2021, and we expect to convert approximately 40% of this backlog to revenue over the next year. Before moving to our cash flow discussion, I'd like to make you aware of an adjustment to our reported backlog. During the quarter, we noted that our June backlog included a portion of unshipped orders that had already been recognized in revenue under percentage of completion. Accordingly, a downward adjustment of $46 million at industrial and $19 million at aerospace was made during the third quarter. This adjustment is reflected in our September ending backlog and no further adjustments are anticipated. Earlier reported sales, orders, and book-to-bill were not impacted. Moving to cash flow performance. Year-to-date cash provided by operating activities was $128 million versus $164 million last year, with free cash flow of $101 million down from $134 million last year. Capital expenditures were $27 million down approximately $3 million from a year ago. As a reminder, year-to-date operating cash flow in 2020 saw an approximate $60 million benefit from working capital as cash management was a significant focus during the pandemic. Regarding the balance sheet, our debt-to-EBITDA ratio as defined by our credit agreement was 2.6 times at quarter end, down from 2.9 times at the end of last quarter. Our third quarter average diluted shares outstanding were 51.1 million during the third quarter. We did not repurchase shares and approximately 3.6 million shares remain available under the board's 2019 stock repurchase authorization. Turning to slide six of our supplement, let me provide you with our updated financial outlook for 2021. Organic sales are forecast to be up 11% to 12% for the year, consistent with our prior view. Foreign exchange is expected to have about a 2% favorable impact on sales, while divested Seager revenues will have a small negative impact. Adjusted operating margin is forecast to be approximately 12.5%, down slightly from 13% in our July outlook. We expect a small amount of residual restructuring charges in the fourth quarter, which we will take as an adjustment to 2021 net income. Adjusted EPS is expected to be in the range of $1.83 to $1.93 per share, up 12% to 18% from our 2020s adjusted earnings per share of $1.64. This expectation reflects a decrease at the top end of our previous range of $1.83 to $1.98 related to Q4 headwinds. A few other outlook items. Our interest expense forecast remains approximately $16 million, while other expense is anticipated to be $6 million, slightly less than our July outlook. We expect a full-year tax rate of approximately 29%, excluding adjusted items. a point lower than our previous estimate. Estimated CapEx of $40 million is down from our prior view of $50 million. Average diluted shares of $51 million is consistent with our prior view. And cash conversion is now anticipated to be approximately 120%, an increase over our prior expectation of greater than 110%. To close, financially we delivered a good third quarter. Looking forward, as Patrick mentioned, there are some near-term economic pressures to overcome as we close out the year. Leveraging the Barnes enterprise system, our team is focused on executing comprehensive mitigation plans. In the meantime, our cash generation remains solid and our balance sheet supports ongoing growth investments expected to further improve financial performance and long-term shareholder value. Operator, we will now open the call for questions.
spk06: Ladies and gentlemen, at this time, if you would like to ask a question, please press star 1 on your telephone keypad. And if you would like to withdraw your question, press the pound key. Please stand by for your first question. Your first question comes from Matt Somerville with DA Davidson. Your line's open.
spk03: teams range that we've seen the last few quarters, and we wouldn't expect them, therefore, to normalize until you see either input cost relief, supply chain relief, et cetera. What's the right way to be thinking about that looking out over the next couple of quarters?
spk01: Matt, can you repeat the question? We didn't catch the beginning.
spk03: Yes, sorry about that. On industrial, with the moving pieces you're seeing in the business, are incrementals likely to stay stuck in this sort of high-teens range, or are there things, levers you can pull to start to get those incrementals back to where they ought to be, or are we basically going to stay here until you get input cost and or supply chain relief?
spk00: Thanks, Matt. Well, relative to margins, what we've seen is a continued improvement sequentially year over year. So the team has done a really nice job sequentially throughout the year improving margins with some increase in inflation pressures as I noted. Two factors that I think are hitting margins at the moment are the inflationary costs as well as some of the sales pressure on top line as a result of some of the semiconductor issues. So we see the semiconductor top-line issue continuing to improve, both from an engineered component standpoint and then also on a go-forward basis from a molding solution standpoint, particularly mold. So with those continued increase in revenues, we'll see the flow through there. Relative to the inflationary supply chain issues, What the team has done a wonderful job of is offsetting any costs or a lot of the costs that have come from raw material issues with respect to pricing initiatives and passing on those costs. The area that has been more challenging is on the freight, and that being freight of our own products internally within businesses as we ship product overseas. And so that area continues to be a key area of focus. But overall, I would expect that as we continue to move forward, margins, the intent is for margins to continue to expand with the team achieving 13% this quarter, which was 130 basis points improvement sequentially.
spk03: Got it. And then just as a follow-up, with respect to M&A, can you talk about actionability of the pipeline, thoughts on maybe Barnes doing a bigger deal, where you'd be comfortable taking leverage, and whether or not there may be something more chunkier in size in your funnel at the present time? Thank you.
spk00: Thanks. Well, on the M&A side of the house, we continue to be very active in terms of our due diligence around targets that align with our strategic initiatives. And to that end, you know, a primary area of focus continues to be on the industrial side with respect to our automation SBU, as well as our molding solutions business. Across the other parts of the portfolio, we continue to look at targets as well, but they have been you know probably a little secondary to the two primary areas of automation and molding solutions with respect to um the pipeline we have you know one of the areas we've continued to focus on is cultivating deals um as opposed to participating in you know auctions not that we wouldn't participate in an auction so We're pleased with some of the progress that's been made. At the same time, you know, we don't control the timing. But as you've seen, with our balance sheet, we've continued to pay down debt and de-lever since the pandemic. So we're building dry powder relative to our future goals of M&A. Thank you. Thank you, Jeff.
spk06: All right, and your next question comes from Christopher Glynn, Ledopenheimer. Your line's open.
spk04: Yeah, thanks. Good morning. Good morning. Congrats on a good third quarter. I was curious, the industrial lawyers in backlog, you know, coming in a little on the light side, really in the context that we're seeing a lot of companies uh you know really build backlog and can't keep up with orders um i know you have your own channels and early mid late cycle orientation um but i'd rather you explain that that kind of disconnect than i speculate yeah well the backlog side on the industrial uh for our industrial business uh i would argue has been you know uh
spk00: primarily consists of the molds business as being a primary driver and invariably what we've seen is a continued somewhat lumpiness with regard to mold orders and as such you know from quarter to quarter we've seen you know ups and downs relative to the timing of receipts with this particular quarter what we saw was a continued strength in medical, with it being up year over year and sequentially, where we saw some softness was in the personal care and packaging mall side of the business. Whilst personal care had good sales in the quarter, orders were lighter. So I think that's the primary contributor. We have, you know, Again, the teams have done a really nice job of meeting customers' expectations even through the supply chain issues. And to be honest, that has partially contributed to some of the freight charges I mentioned as well, because if we push product expedited to overcome some of the supply chain issues, it comes at a cost.
spk04: Great. Thanks, Zach Collar. And, you know, I'm just curious if we could take a big picture view and kind of step back to thinking about how you might step back 130 to 140 million industrial OP over the cycle, you know, where you were for a few years. And, you know, in particular, I think dramatic incentives are the key cyclical levers to get that. Do you see that earnings power kind of fully intact, or has there been a little skating along the way?
spk00: No, I think the two businesses you referenced continue to be very well positioned in terms of their market leadership. With respect to Cerventiv, clearly there's a cycle that comes with the program launches. and right now we remain very positive in terms of the outlook there particularly as it pertains to the transition towards electric vehicles so you know we've seen a a nice uptick now for a number of quarters on the uh you know program launches with you know some really nice strength across all three regions in the quarter as it pertains to you know just some of the near-term activities. We do believe that there are decisions being made by the auto OEs relative to timing of release of certain projects. When I say timing, I'm talking quarters. I'm not talking anything extended. But I do think that they're being judicious as they manage their businesses in the current semiconductor situation. With regards to dramatic a really nice quarter, up 24% year over year, and continue to excel in terms of the products they're bringing to market. Just a great range of innovative solutions for robotics and end-of-arm complex tooling systems, both of which I think are in high demand across multiple industries. But they are definitely looking to expand beyond their current product lines with the launch of Vacuum earlier this year as a complementary revenue stream on a go-forward basis. So the goal for us is to get back clearly to the mid-teens for industrial and then to continue to march on from there.
spk04: Great. And clarification question. Did you say that you expect industrial margin in the fourth quarter to improve sequentially again?
spk00: No, it's down slightly because of the pressures of the semiconductors and the supply chain challenges that we're seeing in the short term. Gotcha. Thank you. Thank you. Thanks, Chris.
spk06: Your next question comes from Miles Walton with UBS. Your line's open.
spk02: Good morning, Julie, Patrick, Bill. You've got Lou on for Miles. Good morning, Lou. Good morning. So I guess the question I had was around the cash flow. Is there anything to be mindful of as we go into the fourth quarter just that would make cash flow step down sequentially from the level it was in the third quarter?
spk05: No, I don't anticipate anything that we should be mindful of. I think as We continue to see trends that go into year end. Sometimes the conversion isn't traditionally what it is earlier in the year. And so there's nothing atypical we're expecting. I think greater than 120% or approximately 120% is still a very nice conversion.
spk02: No, no, definitely. It just still seems like there could be upside that still. And then just one more, I may have missed it. I may have missed you on the call earlier. Did you give the breakdown for RSPs and MROs? Again, I apologize if I missed it.
spk00: No issue. What we did was we highlighted the breakdown of orders. And, you know, just so if you want to – are you interested in order or sales?
spk02: Sales group, sorry.
spk00: Okay. So on the sales side, aftermarket was up approximately – 40% plus in the quarter. Out of that, MRO up approximately 40%, and RSPs were up 70%. Okay, that's right.
spk02: Thank you very much.
spk00: And then sequentially, aftermarket was up approximately 16%.
spk02: Great. And just one more quick one. The press release, I think, came out, maybe it was yesterday or earlier in the week, on the Rolls-Royce. Was that just a continuation of, I guess, a product or sales, or was there any expansion in there?
spk00: It was primarily an expansion through 2025 of an existing set of offerings that we had to Rolls-Royce. What was, I think, significant about that is that the recent sale of the business, the ITP business, which was a subsidiary of Rolls-Royce, as that transaction took place, our goal was to secure the relationship with the new owners and with ITP on a go-forward basis. So a nice win there by the aerospace team.
spk02: Great. Thank you very much. Thanks, Luke. Thank you.
spk06: Your next question comes from Pete Osterlund with Tourist Securities. Your line's open.
spk04: Hey, good morning. This is Pete on for Mike Tramoli. Thanks for taking our question this morning. Morning. Morning. Morning. I wanted to ask you about the backlog for aerospace OEM. Just, you know, given that you're seeing continued sequential recovery in that market, What drove the 4% decline for the backlog versus the second quarter? Are there any concerns around the current bookings environment, or was it just more of a quarterly timing issue?
spk05: Yeah, there's no concerns at all. The primary driver of that decline was the adjustment we made to back out the percentage of completion that had been included. So really no underlying concerns at all.
spk04: okay great thanks and then just um sticking with aerospace you know looking into next quarter and into 2022 are you anticipating any issues meeting the labor requirements you need in order to be able to you know meet rising aerospace demand you know hopefully have a strong recovery in 2022 um you know is there any risk of labor shortages or accelerating wage inflation
spk00: I think labor is an area that we're continually focused on across the businesses, both industrial and aerospace. I would argue that aerospace, I think, has seen more labor pressure than has the industrial side of our business. That said, the team has done a really nice job of continuing to put programs in place, recruiting programs, and looking at how to attract talent to our industry and specifically to Barnes. So it's an area that I think the entire industry is keeping a watchful eye on. We've been making nice progress. It hasn't necessarily... caused anything significant in terms of issues in the short term, but clearly we are recruiting in anticipation of increases throughout 2022. So the team is being very proactive out in front of it and being creative in terms of how we attract talent to Barnes.
spk04: All right. Thank you very much for taking the questions.
spk00: Thank you.
spk06: All right, thank you. We don't have any further questions at this time. I'll hand the call back to Bill Pitt for any closing remarks.
spk01: Great, thank you. We would like to thank all of you for joining us this morning and look forward to speaking with you next on December 14th with our 2021 Virtual Investor Day. Operator, we will now conclude today's call.
spk06: Thank you, and that concludes today's conference. Thank you all for joining. You may now disconnect.
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